Fuel subsidies have been on the radar for quite some time now, finally the decision is here

Finally, UAE to end fuel subsidies

The International Monetary Fund must be heaving a big sigh of relief. After multiple reiterations, at least one country in the Middle East is all set to withdraw fuel subsidies.

UAE’s Ministry of Energy has announced that fuel prices would be deregulated as of 1 August, 2015. With the adoption of the new policy, the fuel prices will be linked to the global prices. The Ministry believes that the decision will fuel the national economy, lower consumption of gasoline and diesel, protect the environment and preserve national resources. It also said that the decision will also encourage individuals to adopt fuel-efficient vehicles, including the use of electric and hybrid cars.

“The decision to deregulate fuel prices has been taken based on in-depth studies that fully demonstrate its long term economic, social and environmental impact. The resolution is in line with the strategic vision of the UAE government in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies. This step will put the UAE on par with countries that follow sound economic methodologies. It is also anticipated to improve the UAE’s competitiveness while positioning the nation on international indices,” said Suhail Al Mazroui, Minister of Energy.

Commenting on the new policy, Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “Deregulating oil prices should support the national economy in the longer term whilst also helping consolidate government finances. The context – of sustained lower oil prices – means that the UAE has chosen the right period to adjust oil subsidies. As ICAEW’s recent Economic Insight report noted, removing subsidies during a period of subdued global oil prices should mean the inflationary impact will be felt less sharply. The more so as consumer protection is a stated focus of the new fuel price committee.

“However, even though prices should not shift dramatically in the immediate future, the knowledge that households and businesses alike will no longer be isolated from global oil prices through government spending should influence behaviour. Households will start to think about how they can reduce their reliance on fossil fuels in case of future price hikes. Businesses will start to develop energy use strategies in case of market price rises. This policy should, therefore, incentivise reduced consumption – and thereby protect the environment and preserve natural resources – going forward.”

Why should the fuel subsidies be done away with?

According to the ministry, the decision will encourage the use of public transport. The transport sector was responsible for 22% of the total greenhouse emissions in the UAE in 2013 amounting to 44.6 million tons of carbon dioxide. Given this stark reality, he added that increasing the use of public transport and reducing dependence on individual vehicle usage will have a positive impact in lowering carbon emissions. In this regard, the Minister of Energy pointed out that the UAE has an advanced public transport system with options that are environmentally friendly such as taxis that work on natural gas.

“Considering the international prices of oil and petroleum derivatives, we expect diesel prices to go down. This will stimulate the economy as lower diesel price would mean lower operating costs for a wide number of vital sectors like industry, shipping and cargo among many others,” the minister added.

Interestingly, the cost of gasoline represents 3% to 4% of an average income in the UAE, which is a reasonable percentage compared to international costs. Consequently, deregulating prices would not have a notable impact on individuals’ costs of living.

How subsidies have been bad?

It is a drain on the economy and the resources of a nation for any government to keep supporting subsidies. In the absence of a government willing to support subsidized prices, the burden would have been transferred to the UAE. UAE fuel retail companies also cannot support the burden of the luxuries of the entire population.

Why now?

The UAE, the third-biggest OPEC producer will be the first one to link gasoline and diesel prices to global oil markets. It will be the first country in the Gulf to lead by example. Unleaded gasoline sells for AED 1.83 which is 50 cents as compared to 84 cents in the US. There has been pressure from international agencies to get the prices on par with the global prices.

The Ministry of Energy has assigned a dedicated number (0565467942) and email id (fuelprice@moenr.gov.ae) for public inquiries on the new deregulated fuel prices.

The Latest UAE Fuel Pricing News – What the Twitterati community says:

Umar posted a funny photo on how possibly he will “upgrade” his life – after the UAE Ministry of Energy announced the news that they are going to deregulate fuel prices in the UAE.

Dubai based journalist Megha says it all with one tweet — on the promise for expats that UAE has (so far) offered.

Arabian Gazette contributor Sheikh Rehmatullah is “profusely” sorry for all his complaints against Dubai Metro’s service. Quite understandably!

Saves the planet and environment – but at the cost of burdening the common man (mostly expats)

Jasmine is taking a healthy approach to this news of possible fuel price increase in the UAE following the removal of subsidies.

Shelina reflects the views of most expats in the UAE on the possible rise in petrol prices which will have an impact on almost all other sectors, especially food prices.

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